It has been a rough year for the ASX share market, though AMP Ltd (ASX: AMP) shares have been one of the few to rise strongly, up by more than 20%.
The global economy is going through a difficult time with inflation, higher interest rates, challenging changes in foreign currency markets and expectations of a slowing of growth.
Australia may seem to face a tricky situation. Households are being slugged with much higher loan repayments and a number of commodity prices have fallen, including the iron ore price with Chinese demand reducing.
But, it's not all doom and gloom. Shane Oliver, an expert from AMP, shares his view about why things may not be too bad.
Solid business investment outlook
He pointed to ongoing strong business investment plans.
Oliver said that 'real' business investment is expected to grow by around 5% over the year ahead, with the Australian Bureau of Statistics capital spending intentions survey showing a 15% increase compared to a year ago.
Home building work pipeline
Construction is an important part of the Australian economy. While approvals to build new homes have fallen "about 25%", he noted that there is still a large pipeline of work yet to be completed "with home completions yet to catch up" with the surge in approvals through COVID-19.
This will "likely provide a floor for home building", preventing a plunge.
National income boost from energy
Energy prices are one of the biggest causes of inflation in the country, but this is actually helping national income thanks to the earnings of energy ASX shares and other energy companies. We've seen the profits of Woodside Energy Group Ltd (ASX: WDS) and Santos Ltd (ASX: STO) soar.
This helped the budget deficit by $48 billion in the last financial year and is expected to help by $42 billion in this financial year, giving the Australian government more financial flexibility.
Slower RBA increases
The latest increase in the cash target rate was 0.25%, even though there were a number of voices calling for a 0.50% increase.
Oliver noted that the RBA will do what it takes to return inflation back to normal, "while keeping the economy on an even keel". This 0.25% increase could strike "the right balance between doing too much and too little".
It could be worth pointing out that a number of ASX financial shares have done well in recent weeks. AMP shares are up more than 10%, Commonwealth Bank of Australia (ASX: CBA) shares are also up more than 10% while Westpac Banking Corp (ASX: WBC) shares are up around 10%.
Potential for lower Aussie dollar
The Australian dollar has already fallen against the US dollar this year. However, if the prices decline for the commodities that Australia exports, then this could lead to further falls for the Australian dollar.
Why would that be a good thing for the Australian economy? Oliver suggests that this would make the exports more competitively priced, as it did in the GFC.
He also pointed out that the Chinese zero COVID policy could be lifted, a positive example being the relaxation of PCR test requirements in some regions. An end to the zero COVID policy "could result in a sharp rebound in Chinese growth" which could then boost global growth and Australian growth.
Rebound of immigration
Now that Australia's border is open again, the federal budget is expecting net immigration of 235,000, after negative net immigration in FY21.
Immigration, according to Oliver, will "help ease the labour shortage and tight jobs market… Which in turn will help head off a surge in wages growth to levels well beyond those consistent with the inflation target."
Comparatively less inflation
On this point, Oliver made the point that if the Australian economy remains resilient, the RBA may need to increase interest rates even more to slow demand.
But, he believes that the RBA won't need to increase the interest rate too much more for a few different reasons.
Oliver pointed out that Australian wages are not growing like they are in other countries, energy prices have not gone up as much as in Europe, inflation expectations remain relatively low, other central banks are doing some of the heavy lifting, and US price pressures are starting to slow which "should benefit Australia which is following US inflation with a six-month lag".
Slower interest rate increases and a lower peak would probably help AMP shares, and plenty of other valuations, thanks to less damage being done to household budgets and less pressure on share prices. In theory, higher interest rates are meant to push down the value of assets because investors can get a higher risk-free rate of return from government bonds.
